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Brief Note on Applicability of CARO 2016

CARO 2016 : Brief Note on Applicability of CARO 2016

Introduction:

The MCA has issued the Companies (Auditor’s Report) Order, 2016 (CARO 2016), on 29th March 2016. This order has been issued in supersession of the Companies (Auditor’s Report) Order, 2015, and is applicable for reporting on financial statements of companies whose financial year commences on or after 1st April 2015.

It was of the opinion of MCA that there are certain matters which is considered to be important for reporting financial statements for some entities as a part of Auditor’s report. There is a requirement on the part of the auditor of those certain entities to report on some particulars points as mentioned under section 143 of the Companies Act, 2013 after doing all the necessary inspections and verifications of the same.

Applicability:

CARO 2016 is applicable to all the companies including a foreign Company except the following (which) are specifically excluded from its purview:

Banking Company as defined under Section 5 (c) of the Banking Regulation Act, 1949.

Insurance Company as defined under the Insurance Act 1938.

Company licensed to operate under Section 8 of the Companies Act 2013 (Companies registered with charitable object).

A one-person company (OPC) as defined under clause (62) of Section 2 of Companies Act 2013 (OPC means a company which has only one person as a member).

A small company under Section 2 (85) of the Companies Act, 2013.

Scope:
Number of Companies are now covered in CARO, 2016. There are mainly two factors that have widened the application of CARO 2016 viz. Small Companies and Foreign Companies.

As per sec 2(85) of Companies Act 2013 small company means a company, other than a public company:

a) Paid up share capital of which does not exceed 50 lacs or such higher amount as may be prescribed which shall not be more than 5 crores, and

b) Turnover of which as per its last profit and loss account does not exceed 2 crore or such higher amount as may be prescribed which shall not be more than 20 crores.

Note: The following company shall not qualify as a small company:

a) A holding company or a subsidiary company.

b) A company registered under Section 8 of the Act.

c) A company or body corporate governed by any special act.

The definition of Foreign Company has been also widened in section 2 (42) under Companies Act, 2013. Now, a Company shall become foreign Company if such Company or body corporate incorporated outside India has a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

Note:
The auditor of the following Private Company is not required to comment on the matter prescribed under CARO 2016:

i) A private company which is not holding or subsidiary Company of a public company;

ii) A private company having paid up capital and reserve and surplus not more than Rs 1 Crore as on the balance sheet;

iii) A private company which does not have total borrowing exceeding Rs. 1 crore from any bank and financial institution at any point of time during the financial year;

iv) A private company which does not have total revenue exceeding Rs 10 Crore during the financial year; and

v) CARO shall also not apply to the auditor’s report on the consolidated financial statement (CFS) of the Company.

Such revenue means revenue as disclosed in schedule III to the Companies Act 2013 and includes revenue from discontinuing operation.

SOME IMPORTANT DEFINITIONS:

Revenue:

The term, “revenue”, has been defined by the Order as total revenue disclosed in Schedule III of the Act. Accordingly, the total revenue would include other income as per Schedule III.

Here revenue will also include revenue from discontinuing operations as specified in the Order.

Revenue – Schedule III:

Revenue from operations

Other income

Total Revenue (I + II)

In respect of a company other than a finance company revenue from operations shall disclose separately in the notes revenue from:

Sale of products;

Sale of services;

Other operating revenues (Less)

Excise duty.

Other income shall be classified as:

Interest Income (in the case of a company other than a finance company);

Dividend Income;

Net gain/loss on sale of investments;

Other non-operating income (net of expenses directly attributable to such income).

Paid-up Capital, and Reserve & Surplus:

“Paid-up share capital” as, “that part of the subscribed share capital for which consideration in cash or otherwise has been received. This includes bonus shares allotted by the corporate enterprise”

Includes both equities as well as the preference

Amount of calls unpaid to be deducted

Paid-up on forfeited shares to be added

Share application money received not to be considered

“Reserves & Surplus” to be considered as disclosed in the financial statements prepared as per schedule III of Companies Act 2013;

For term loans, interest accrued and due is considered as a borrowing {interest accrued but not due is not considered as a borrowing;

Financial Institutions:
Sub-section (39) of section 2 of the Act defines the term “financial institution” to include a scheduled bank, and any other financial institution defined or notified under the Reserve Bank of India Act, 1934;

The term “financial institution” shall also cover a non-banking financial company (NBFC);

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